Turbo Power Systems Inc. (TSX:TPS)(AIM:TPS) -
Key Features
-- Revenue increased 118% for the quarter to GBP 4.53 million (2011: GBP
2.08 million)
-- Production revenues, included in the above, in the quarter increased by
129% to GBP 4.13 million (2011: GBP 1.80 million
-- Continued investment in further improving development and operational
capabilities.
-- Research and product development costs remained level at`GBP 0.95
million (2011: GBP 0.95 million),
-- Headcount increased 67% since 31 March 2011 to 221 at 31 March 2012
-- EBITDA loss for the quarter of GBP 1.74 million (2011: GBP 1.37 million)
-- Net loss in the quarter of GBP 2.06 million (2011: GBP 1.62 million)
-- Operating cash outflow in the quarter of GBP 2.90 million (2011: GBP
1.77 million)
-- Loan from TAO UK increased to GBP 10.97 million at 31 March 2012 (2011:
GBP 3.1 million).
Peter Brown, Chief Executive Officer, said:
"Financial performance in the quarter was a loss of GBP 2.06 million, compared
with first quarter 2011 loss of GBP 1.62 million and fourth quarter 2011 loss of
GBP 2.18 million.
We remain a technology-led company, and have continued to strengthen the
technical team to ensure we support relationships with science-based
corporations who have demanding applications for our technologies.
Whilst Order Intake has been slow in the first quarter of 2012, we have seen an
increasing number of system based enquiries. Order intake in the quarter was GBP
0.1 million, with significant wins expected in the rest of the year. Of
particular note is our performance in the rail sector, with significant
programmes being bid in Asia and North America.
We continue to develop our relationship with TPS's majority owner TAO UK and its
parent VSE, which is headquartered in Brazil where we see significant prospects
for growth.
Further to the Company's announcement of the same date, a circular to
shareholders was posted on 2 May 2012 giving details of certain resolutions
proposed to address the Company's financial positions and certain matters raised
by the Toronto Stock Exchange, amongst others. The Board strongly encourages
shareholders to read the circular and recommend that shareholders vote in favour
of the proposals."
Notes to Editors
About Turbo Power Systems
Company Website: www.turbopowersystems.com
Turbo Power Systems Inc (TSX:TPS)(AIM:TPS) is a leading UK based designer and
manufacturer of innovative power solutions. TPS's products are all based on its
core technologies of power electronics and high speed motors and generators and
are sold into a number of market sectors including aerospace, rail, and various
industrial sectors. The Company's products provide improved efficiency and
reduced energy consumption compared to existing technologies.
Turbo Power System's existing third party customers include blue chip companies
such as Bombardier Transportation, McQuay International and Eaton Aerospace. The
Company also has commercial contracts with its ultimate parent company, Vale
Solucoes em Energia S.A. ("VSE"), the Brazilian energy solutions company, and
with Tao Sustainable Power Solutions (UK) Ltd ("TAO UK"), which is a VSE wholly
owned subsidiary and TPS's parent undertaking, owning 75.4% of the issued share
capital of the Company.
Forward looking statements
This press release contains forward-looking statements. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events, or performance, and underlying assumptions and other statements
that are other than statement of historical fact. These statements are subject
to uncertainties and risks including, but not limited to, the ability to meet
ongoing capital needs, product and service demand and acceptance, changes in
technology, economic conditions, the impact of competition, the need to protect
proprietary rights to technology, government regulation, and other risks defined
in this document and in statements filed from time to time with the applicable
securities regulatory authorities.
Definition of non-GAAP financial measures
EBITDA is calculated as the net loss for the period less financial interest
income and charges, foreign exchange gains and losses, tax charges and receipts,
depreciation, amortization, and stock compensation charges. The Company believes
that EBITDA is useful supplemental information as it provides an indication of
the operational results generated by its business activities prior to taking
into account how those activities are financed and taxed and also prior to
taking into consideration asset amortization. EBITDA is not a recognised measure
under GAAP and, accordingly, should not be construed as an alternative to
operating income or net loss determined in accordance with GAAP as an indicator
of financial performance or of liquidity and cash flows. EBITDA does not take
into account the impact of working capital changes, capital expenditures and
other sources and uses of cash which are disclosed in the consolidated statement
of cash flows. The Company's method of calculating EBITDA may differ from other
issuers and may not be comparable to similar measures provided by other
companies.
Notice of no auditor review of interim financial statements
Under Canadian National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an
auditor has not performed a review of the interim financial statements, they
must be accompanied by a notice indicating that the financial statements have
not been reviewed by an auditor.
The accompanying un-audited interim financial statements of the Company have
been prepared by and are the responsibility of the Company's management.
The Company's independent auditor has not performed a review of these financial
statements in accordance with standards established by the Canadian Institute of
Chartered Accountants for a review of interim financial statements by an
entity's auditor.
OPERATIONAL REVIEW
This review has been prepared as at 12 May 2012.
Business of the Company
Turbo Power Systems designs and manufactures high performance electric motors,
generators, and power electronics systems and provides custom solutions to
energy conversion, industrial, transport and military markets.
TPS is a technology-led organisation and provides solutions to difficult and
challenging requirements. The Company's track record in engineering innovation,
which has been built and tested over a number of years, allows us to meet
challenging design and manufacturing briefs with specific requirements relating
to environmental performance and performance to volume demands.
TPS has a proven track record in the development and deployment of equipment in
the rail and industrial sectors. The long term relationships with customers in
these markets have been built based on delivering technology-rich competitive
products with proven reliability.
Based on an established electrical machines and power electronics expertise
developed over the last 30 years, the Company plans to build upon its existing
portfolio of products and expand in growing markets and regions.
Strategic Direction
We are intent on remaining a technology-led company.
We have further strengthened the technical team with a number of key
appointments to ensure we support and grow relationships with science based
corporations who have demanding applications for our technologies and knowhow.
At 31 March 2012 the business employed 221 people (including temporary staff),
an increase of 89 compared to 31 March 2011.
As such, the business continues to pursue applications for its technologies and
to leverage its relationship with TAO UK, the Company's 75.4% majority
shareholder, and its parent VSE, which is headquartered in Brazil. We have seen
an increasing number of systems based enquiries, both from Brazil and elsewhere,
and we have a firm belief that the marketplace has now recognised the value of
our technology. As a consequence we anticipate significant new orders throughout
2012.
Operationally our emphasis is on developing integrated systems. We also
recognise that our customer base is increasingly keen to secure regional
manufacture capability outside the UK. We are taking steps to ensure that TPS is
commercially and operationally capable of responding to this global trend.
Following a detailed market and capability review, a revised business strategy
was established and areas of real growth identified. The management team
believes that TPS' success will hinge on a balanced business strategy based on
three key elements:
-- Growing the existing markets of rail and industrial systems through
improved product designs, reduced cost and increased margin and scope of
supply;
-- Expansion of engineered solutions offerings in energy, marine, oil & gas
sectors where TPS is the supplier of choice owing to its responsiveness
and technology capabilities;
-- Development of complete products based on VSE/TPS synergies allowing us
to access multiple customers and to transition to a 'value based
pricing' model.
Based on our established electrical machines and power electronics expertise
developed over the last 30 years, the Company plans to build upon its existing
portfolio of products and expand in growing markets and region, as follows:
-- Rail
TPS' addressable market for power electronics products is significant.
Customers' key buying criteria are conformance to specifications, lower size and
weight and also lower price. In order to remain competitive and eliminate some
of the barriers to growth, the Company will pursue technologies that will not
only increase the power density of its products, but also increase their
efficiency and reduce their cost by increasing material utilisation. The Company
will focus on platform products to optimise cost, quality and delivery
performance. In addition, TPS will focus on establishing a profitable and long
term future, through strategic partnerships in countries with high growth
potential, especially Brazil, India and North America.
-- High-Speed Motors Offerings
The Company offers electric motors and associated high speed drives to the
global chiller compressor market in which we can potentially participate in over
40% of the total market. Over the years, TPS has forged a strong relationship
with one of the major heating, ventilation and air conditioning ("HVAC") global
suppliers. Building on that relationship, the Company plans an expansion of its
technology to the greater power required by the growing market of industrial
HVAC and gas compression. TPS will pursue strategies to increase its scope of
supply, as well as forge strategic partnerships with key component manufacturers
to secure its supply going forward.
-- Specialist Applications Sector
TPS' current portfolio of products is specific to specialised markets. These
include laser power supplies and blowers and Megawatt class power generators for
the military.
These markets have been, and are expected to remain, steady in the future. In
2012 the Company anticipates a continuation of current order levels.
Furthermore, based on the success of the TPS Megawatt class generator, it is
anticipated further units will be required.
-- Maintenance Repair and Overhaul ("MRO")
MRO for both our products and those of our competitors is a growth area for the
Company.
One particular market with substantial global growth is the rail sector, both
designing obsolescence out and replacing rotary power supplies with static
converters.
The MRO function is critical to our core business as TPS will be judged on its
ability to support its products over the life cycle.
In 2012 TPS plans to implement a detailed MRO business strategy and form a
support organisation to deliver it. In all current and future bids, the company
intends to introduce a service element to extend TPS's value proposition.
-- Future Markets
The new growth engines for the Company's product portfolio will be driven by the
desire for TPS to become a systems and solution provider, rather than a
component supplier. Achieving this will move the Company up the value chain.
The Company has proven that it has the expertise to develop Megawatt class
turbine driven permanent magnet generator systems through the development of its
1.2 MW system. Now the know-how and expertise will be applied to 5 and 10 MW
systems. With their small foot print and light weight, the Company's offering
has the required attributes for applications in distributed generation and off
shore platforms which are in high demand. The expansion to these higher power
levels will be used as a platform to develop medium voltage technology and as
well as the approach of standardised building blocks for the energy sector. This
would lead to a reduction in cycle time and lower cost of development for future
products.
Our intention is that TPS' offerings will consist of a compact permanent magnet
generator, associated power converter and conditioning equipment. The generator
will be coupled to the gas turbine using a flexible coupling. The power
converter provided by TPS will be integrated with the gas turbine control
system.
The Company's high speed electrical machines can be integrated with turbo
machinery provided by VSE to develop integrated generator systems for energy
recovery systems. These types of systems can be used to extract energy from the
exhaust of diesel engines used in power generation and marine propulsion
systems. This is a growing market that would allow energy systems to improve in
efficiency. Systems from 300 KW to 1 MW are anticipated and these will use
building blocks already in production or under development for other markets to
reduce the non-recurring cost. The business will be based on a combination of
hardware sales or revenue sharing models.
There are great opportunities for TPS and VSE to enter into the fast growing
field of subsea equipment. The need for subsea power distribution and processing
equipment is driven by the challenges posed by the depths and distances involved
in the new off shore finds around the globe, particularly in Brazil.
Current Operating Climate
The transport market continues to show resilience, while the industrial sector
has been largely stable. This has made it possible for TPS to deliver a strong
manufacturing output during 2011. Further growth is anticipated during 2012,
supported by the strong order book and the completion of certain delayed
development programmes.
As stated last year, governments are continuing to invest in infrastructure
projects and, indeed, view transport initiatives such as new rail programmes as
a way of helping to sustain their industries whilst providing necessary public
transportation and having a positive impact on the environment.
In the defence arena, the Company has continued to identify specialist pockets
of growth potential in areas where TPS' technology can be applied. We have
initiated contact with potential future partners and will continue to
investigate this market further and hope to see increased activity during the
coming years.
Marine and oil & gas sector development has seen the number of opportunities to
utilise TPS products and technologies in 'new' markets increase markedly. A
significant amount of market analysis and concept work started during 2011 and
will continue in 2012. The market potential is significant and the links with
VSE shareholder have provided the business with important leverage in Brazil.
The requirements for high system efficiencies and sustainability are becoming
important factors by which products and services are selected. TPS's
technologies and know-how have allowed it to offer competitive solutions in the
road to sustainability. These technologies are applicable to the renewable
energy sector and to waste energy recovery applications. The technology is
intended to enhance system efficiencies and thus contribute to the
sustainability goals. The market potential for TPS technologies in this sector
is significant and further development in these markets is anticipated this
year.
As expected, financial constraints have continued for the first quarter of 2012,
with further support for working capital secured in the first quarter. Prospects
for long term significant growth in the latter part of 2012 and beyond remain
positive.
The current order book is strong. Execution of those orders and completion of
development programmes in a consistent and timely manner will be the key in
delivering management's plans for the improved results during 2012.
Financial Performance
Financial performance
Total revenues in the quarter ended 31 March 2012 of GBP 4.53 million were 118%
higher than 2011 (2011: GBP 2.08 million), primarily due to increased production
volumes, particularly those associated with major programmes with Bombardier.
The Board continued to implement its strategy of seeking to further improve the
Company's development and operational capabilities.
Research and product development costs remained level at GBP 0.95 million (2011:
GBP 0.95 million).
General and administrative costs, which consist mainly of staff costs,
facilities costs and the costs associated with the Company's public listings,
were up by 15% from 2011: GBP 1.17 million to 2012: GBP 1.34 million. The major
element in the increase of GBP 0.17 million was higher staff costs as a result
of increased headcount.
The Company recorded a loss before interest, tax, depreciation, amortization,
foreign exchange gains and losses and stock compensation for the quarter of GBP
1.74 million (2011: GBP 1.37 million) primarily as a result of reduced operating
margin on production contracts and increased costs.
The Company also recorded an operating cash outflow before working capital
movements of GBP 1.75 million for the quarter (2011: GBP 1.42 million). After
adjusting for changes in working capital items and purchases of property, plant
and equipment suffered an overall cash outflow of GBP 3.21 million (2011: GBP
1.80 million).
Net cash inflow from financing during 2012 of GBP 2.82 million (2011: GBP 1.20
million), resulted in an overall net cash outflow for the quarter of GBP 0.39
million (2011: GBP 0.60 million).
The Company finished the quarter with an unrestricted cash balance of GBP 0.26
million and held further cash of GBP 0.34 million associated with rent deposit
and utility bonds.
During the period ended 31 March 2012 the Company undertook two significant
transactions with related parties. In January 2012 the Company negotiated a
further loan facility from its majority investor TAO UK, which provided GBP 1.02
million to support working capital requirements, bearing interest at 6% and
being repayable on 30 days' notice. In March 2012 the Company increased this
loan by a further GBP 1.8 million, this tranche being repayable on 1 April 2014.
Going Concern
These interim condensed consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards applicable to a going
concern, which assume that the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of operations.
As at 31 March 2012 the Company had net operating cash outflows. The cash
position at the beginning of the year and all the necessary investments to
support the growth plan will require additional funding which, if not raised,
may result in the curtailment of activities.
The Company has a cumulative deficit of GBP 88.32 million as at 31 March 2012.
At 31 March 2012 the Company had an unrestricted cash balance of GBP 0.26
million and held further cash of GBP 0.34 million associated with rent deposit.
If the Company is unable to generate positive cash flow from operations or
secure additional debt or equity financing these conditions and events would
cast substantial doubt regarding the going concern assumption and, accordingly,
the use of accounting principles applicable to a going concern. These interim
consolidated financial statements do not reflect adjustments to the carrying
values of the assets and liabilities, the reported expenses and the balance
sheet classifications, which could be material, which would be necessary if the
going concern assumption were not appropriate.
On 30 January 2012 the Company announced that it had extended the loan financing
agreement with TAO UK, its parent undertaking, to provide the Company with
access to a further GBP 1.02 million of debt financing to support working
capital requirements, under the same terms and conditions as the previous loans.
On 26 March 2012 the Company announced that it had extended the loan by a
further GBP 1.80 million to support working capital requirements, but that this
portion of the loan will be repayable on 1 April 2014.
The Directors regularly review and consider the current and forecast activities
of the Company in order to satisfy themselves as to the viability of operations.
These ongoing reviews include consideration of current order book and future
business opportunities, current development and production activities, customer
and supplier exposure and forecast cash requirements and balances. Based on
these evaluations the Directors consider that the Company is able to continue as
a going concern.
Summary of Quarterly Results
The following table sets forth selected quarterly consolidated financial
information of the Company for the last eight quarters;
Research and Net Profit/
All amounts in product General and profit/ (loss) per
GBP '000 Revenue development administrative (loss) share
Restated under
IFRS
June 2010 2,392 523 1,085 (3,127) (0.4)
September 2010 1,887 716 720 (992) (0.1)
December 2010 1,138 1,251 785 (2,969) (0.2)
March 2011 2,083 950 1,166 (1,617) (0.1)
June 2011 3,278 836 1,076 (1,439) (0.1)
September 2011 4,604 975 1,221 (941) (0.1)
December 2011 4,438 1,016 1,438 (2,176) (0.1)
March 2012 4,525 953 1,336 (2,061) (0.1)
Production revenues increased during 2011 as the major programmes with
Bombardier started production.
Research and development expenditure has begun to increase compared with
previous years, reflecting the commencement of development activities related to
opportunities presented by the investment from TAO UK, which became TPS's parent
undertaking in June 2010, and the commercial development contract with VSE,
which is TAO UK's parent.
Reconciliation of net loss to EBITDA result
Quarter ended
31 March
2012 2011
GBP '000 GBP '000
Net loss (2,061) (1,617)
Add back:
Finance expense 138 30
Foreign exchange loss/(gain) 12 50
Depreciation & amortisation 135 167
Stock Compensation 41 -
--------------------------
EBITDA loss (1,735) (1,370)
--------------------------
--------------------------
Copies of Quarterly and Annual Results
The Company's full Financial Results and Managements' Discussion and Analysis
for 2011, together with the First Quarter 2012 Financial Results and
Managements' Discussion and Analysis are available on www.sedar.com and full
2011 financial statements have been mailed to shareholders during May 2012.
Copies of the quarterly and annual results are available from the Company's
office at Unit 3 Summit Centre, Hatch Lane, West Drayton, Middlesex UB7 0LJ,
United Kingdom or available to view from the Company's website at
www.turbopowersystems.com
Review of the quarter ended 31 March 2012
Revenue
Revenue in the quarter ended 31 March 2012 was GBP 4.53 million (2011: GBP 2.08
million.)
2012 2011
GBP '000 GBP '000
Production 4,132 1,794
Development 393 289
--------------------------
4,525 2,083
--------------------------
Production revenue increased by 130%, in line with increased unit deliveries for
major programmes with Bombardier. Development income has increased as work
commences on the new contract signed in the second half of 2011.
Loss making production contracts in 2012 contributed to the increase in revenue,
compared to minimal impact in 2011, but did not contribute to gross profit in
the quarter.
Cost of Sales
The cost of sales in the quarter amounted to GBP 3.95 million (2011: GBP 1.40
million) net of release of provisions for loss making contracts. Production
costs include certain facilities costs attributable to the manufacturing
operation.
Research and product development
Research and product development expenditure in the quarter was GBP 0.95 million
(2011:GBP 0.95 million).
General and administrative costs
General and administrative costs, which consist mainly of staff costs,
facilities costs and the costs associated with the Company's public listings,
were up by 15% from GBP 1.17 million in 2011 to GBP 1.34 million in 2012. The
major element of the increase of GBP 0.17 million was higher staff costs, as a
result of increased headcount.
Finance expense
Finance expense arises from the loans from TAO UK.
Cash flows for the quarter ended 31 March 2012
Cash outflow from operating activities
Operating cash outflow before movements in working capital was GBP 1.75 million
for the quarter (2011: GBP 1.42 million)
Movements in working capital produced a net cash outflow of GBP 1.16 million
during the quarter (2011: GBP 0.35 million).
Investing activities
Cash outflows from capital investments in the quarter were GBP 0.31 million
compared with GBP 0.03 million in 2011.
Financing activities
Cash inflows in the quarter of GBP 2.82 million relate to the increase in the
loan from TAO UK (2011 GBP 1.20 million).
Overall cash outflow for the period
Overall the cash outflow during the quarter was GBP 0.39 million (2011: GBP 0.60
million).
Balance sheet as at 31 March 2012
The Company ended the period with an unrestricted cash balance of GBP 0.26
million compared with GBP 0.65 million at 31 December 2011. Substantially all of
the Company's cash balances are denominated in Sterling.
In addition, the Company had restricted cash amounts of GBP 0.34 million (31
December 2011: GBP 0.34 million), principally relating to a rent deposit on the
Heathrow facility.
Non-current assets (excluding restricted cash) have increased from GBP 1.13
million at 31 December 2011 to GBP 1.30 million at 31 March 2012, after
depreciation and amortisation charges of GBP 0.14 million.
Loans and borrowings (including accrued interest) increased from December 2011:
GBP 8.50 million to 31 March 2012: GBP 11.46 million. The amount of the loan
shown as a current liability, repayable on 30 days' notice,is GBP 9.17 million,
and as a long term liability, GBP 1.80 million repayable on 1 April 2014.
Interest is recorded within current liabilities.
Net current liabilities at 31 March 2012, excluding restricted cash balances
included under current assets, were GBP 8.17 million, compared with GBP 6.75
million as at 31 December 2011.
As at 31 March 2012, the Company had 1,437,754,811 common shares issued and
outstanding and 448,333,334 A ordinary shares issued and outstanding. As at that
date there were 31,377,273 outstanding share options.
Contractual Obligations
Payments due by period
2017 and
there
Total 2012 2013 2014 2015 2016 after
GBP GBP GBP GBP GBP GBP
'000 '000 '000 '000 '000 '000 GBP '000
----------------------------------------------------------
Trade and other
payables 5,631 5,631 - - - - -
Loan notes 10,970 9,170 - 1,800 - -
Operating leases 2,765 419 315 226 226 226 1,353
----------------------------------------------------------
19,366 15,220 315 2,026 226 226 1,353
----------------------------------------------------------
Shareholders' equity
The movement in shareholders' equity comprised:
2012
GBP '000
As at 1 January 2012 (6,326)
Loss for quarter 1 (2,061)
Stock compensation 41
----------------
As at 31 March 2012 (8,346)
----------------
As at 12 May 2012, the Company had 1,437,754,811 common shares issued and
outstanding and 448,333,334 A ordinary shares issued and outstanding. As at that
date there were 31,377,273 outstanding share options.
Liquidity
Cash, cash equivalents and short-term investments at 31 March 2012 were GBP 0.26
million, compared with GBP 0.65 million at 31 December 2011.
Restricted cash at 31 March 2012 was GBP 0.34 million, compared with GBP 0.34
million at 31 December 2011.
The Company reported a loss in the quarter of GBP 2.06 million and has a
cumulative deficit of GBP 88.32 million. The Company's ability to continue as a
going concern depends on its ability to generate positive cash flows from
operations or secure additional debt or equity financing.
The Company has not changed its approach to Currency risk and Interest rate risk
management from that of the prior year and as disclosed in the annual statements
at 31 December 2011.
Currency risk management
Principally all of the Company's expenditure is denominated in Sterling, which
is funded from Sterling cash balances. Exchange differences, which arise on
consolidation of the Company's Canadian operations, are included in exchange
adjustments within the income statement. At 31 March 2012 the Sterling
equivalent of Canadian Dollar denominated net liabilities amounted to GBP 55,000
(31 December 2011: net liabilities GBP 30,000).
Interest rate risk management
The analysis of the Company's financial assets and borrowings analysed between
floating and fixed interest rates is shown below
31 March 31 December
2012 2011
GBP '000 GBP '000
Floating rate financial assets 605 996
Fixed rate borrowings (10,970) (8,166)
The fixed rate borrowings are at 6.0% per annum.
The Company invests surplus cash funds in short term money market deposits with
financial institutions and cash funds which have at least a short term credit
rating of F1.
Financial instruments
The Company's financial assets and liabilities consist primarily of the cash and
cash equivalents, restricted cash, trade receivables, investments, trade
payables and loan notes.
31 March 31 December
2012 2011
Financial Financial
liabilities liabilities
Loans and at amortised Loans and at amortised
receivables cost receivables cost
GBP '000 GBP '000 GBP '000 GBP '000
Asset/(Liability)
Cash and cash equivalent 262 - 653 -
Restricted cash 343 - 343 -
Trade and other
receivables 4,648 - 3,529 -
Trade and other payables - (5,631) - (5,453)
Loan notes - (10,970) - (8,166)
----------------------------------------------------
Total 5,253 (16,601) 4,525 (13,619)
----------------------------------------------------
----------------------------------------------------
The amounts at which the assets and liabilities above are recorded are
considered to approximate to fair value.
Fair value estimation
The fair value of financial instruments that are not traded in an active market
is determined by using valuation techniques. The Company uses a variety of
methods and makes assumptions that are based on market conditions existing at
each balance sheet date. Techniques, such as estimated discounted cash flows,
are used to determine fair value for the financial instruments. The fair value
of forward foreign exchange contracts is determined using quoted forward
exchange rates at the balance sheet date.
The carrying value less impairment provision of trade receivables and payables
are assumed to approximate their fair values due to the short-term nature of
trade receivables and payables. The fair value of financial liabilities for
disclosure purposes is estimated by discounting the future contractual cash
flows at the current market interest rate that is available to the group for
similar financial instruments.
Financial Risk Management and Capital Structure
The Company's risk management programme remains as detailed in the Annual Report
and Accounts 31 December 2011. There have been no significant changes since 31
December 2011.
Further information is provided in Management's Discussion and Analysis and the
notes to the Financial Statements.
Related Party Transactions
During the period ended 31 March 2012 the Company undertook two significant
transactions with related parties. On 30 January 2012 the Company announced that
it had extended the loan financing agreement with TAO UK, its parent
undertaking, to provide the Company with access to a further GBP 1.02 million of
debt financing to support working capital requirements, under the same terms and
conditions as the previous loans. On 26 March 2012 the Company announced that it
had extended the loan by a further GBP 1.80 million to support working capital
requirements, but that this portion of the loan will be repayable on 1 April
2014.
Critical accounting policies and estimates
These interim condensed consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards applicable to a going
concern, which assume that the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of operations. As at 31 March 2012 the Company
had net operating cash outflows. Therefore the Company may require additional
funding which, if not raised, may result in the curtailment of activities. The
Company has a cumulative deficit of GBP 88.32 million as at 31 March 2012.
Further information on Going Concern is provided in Note 2.
The preparation of financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets and
liabilities, revenue and expenses and the related disclosures of contingent
assets and liabilities. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results ultimately may differ
from those estimates.
Estimates and underlying assumptions are continually evaluated and are based on
historical experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. Revisions to
accounting estimates are recognised in the period in which the estimates are
revised and in any future period affected.
The estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are disclosed in the Annual Report and Accounts for 31 December
2011.
Risks and uncertainties
The development and commercialisation plans for the Group's products presented
in this Management's Discussion & Analysis are forward-looking statements and as
such are subject to a number of risks and uncertainties including those detailed
below.
The business entails risks and uncertainties that affect the outlook and
eventual results of the business and commercialisation plans. The primary risks
relate to meeting the product development and commercialisation milestones,
which require that the products exhibit the functionality, cost, durability, and
performance required in a commercial product.
There is a risk that the markets for certain of our products may never develop,
or that market acceptance might take longer to develop than anticipated. Our
business planning process recognises and, to the extent possible, attempts to
manage these risks by pursuing diverse markets for each of our products. Within
these markets our commercialisation plan is focused on products that we believe
have a competitive advantage.
We develop both subsystems and complete systems across our high speed motors and
generators and power electronics product ranges and these development programmes
are subject to risk. These risks include problems or delays due to technical
difficulties and inability to meet design performance goals, including power
output, life and reliability. We mitigate these risks to the extent possible
through detailed project management, formal design reviews, reviews by external
experts, contingency plans which anticipate likely problems, safety reviews,
training and testing programs related to the operation and maintenance of the
products.
We seek to maintain our technology lead through our strong intellectual property
position, which will act as a barrier against competitors, and by continuing to
invest in technology development. However, there can be no assurance that our
present or future issued patents will protect our technology lead. We also rely
upon know-how and trade secrets to maintain our technology lead. However, there
is no assurance that this information can be completely protected.
Another market driver for products is the development of government policy
related to the environment. Unfavourable decisions related to environmental
policies (such as noise and exhaust emission levels) could result in delays in
the introduction of our distributed power generation products. We mitigate, to
the extent possible, the effects of changes in government regulations by
developing products for diverse geographic locations.
We cannot predict with certainty our future revenues or results from our
operations. If we experience significant cost overruns on any of our programs
and we cannot obtain additional funds to cover such overruns or additional cash
requirements, certain research and development activities may be delayed,
resulting in changes or delays to our commercialisation plans. We may be
required to raise additional capital through the issuance of equity or debt. We
seek to mitigate this risk by securing funding commitments from a variety of
sources and through adjustments to our development plans, by maintaining a
substantial cash reserve, by being financially conservative in our expenditures
and by maintaining good communications with investors and investment bankers to
assist us should we need to access the public or private capital markets.
We are also subject to normal operating risks such as credit risks and foreign
currency risks. Foreign currency sales and purchases are made in Sterling,
Euros, Canadian and US Dollars. Over time, currency balances are matched, to the
extent possible, to planned currency purchases.
Internal Control
The Board of Directors has overall responsibility for the accounting policies
and ensuring that the Company maintains an adequate system of internal financial
control to provide them with reasonable assurance that assets are safeguarded
and of the reliability of financial information used for the business and for
publication. There are inherent limitations in any system of internal financial
control and, accordingly, even the most effective system can provide only
reasonable, and not absolute, assurance with respect to the preparation of
financial information and the safeguarding of assets.
Management, under the supervision and with the participation of the Chief
Executive Officer and the Chief Financial Officer, is also responsible for
establishing and maintaining adequate internal controls over financial reporting
within the Company. Management have designed and evaluated the effectiveness of
the Company's Internal Controls over Financial Reporting to provide reasonable
assurance that the financial reporting is reliable and that the consolidated
financial statements are prepared in accordance with International Financial
Reporting Standards. Based on the latest evaluation, management has concluded
that the following potential weaknesses existed as at 31 March 2012, but that
they are sufficiently mitigated through appropriately designed controls.
Management has determined that these controls are effective and provide
reasonable assurance that the financial reporting is reliable and in accordance
with IFRS.
Limited resources
Given the Company's size, it has limited resources within the Finance
department. This impacts on its ability to provide comprehensive knowledge in
certain areas of financial accounting, as detailed below. The Company is highly
reliant on the knowledge of a limited number of employees and on the performance
of mitigating procedures during its financial close and consolidation process to
ensure that the consolidated financial statements are presented fairly and in
all material respects.
Income taxes
Income tax law is a highly technical area that requires an in-depth
understanding of national, international, federal and provincial tax laws and
the Company's Finance staff has only a fair and reasonable knowledge of the
rules related to income tax accounting and reporting. Although this represents a
weakness in the Company's control environment, the Company retains and will
continue to retain the services of external experts to provide advice and
guidance on income tax accounting and disclosures. The Company does not consider
that this weakness in control environment has resulted in any material
misstatements of the financial statements.
Complex and non-routine transactions
At times the Company records complex and non-routine transactions which are
extremely technical in nature and require an in-depth understanding of IFRS. The
Company's Finance staff has a fair and reasonable knowledge of the rules related
to IFRS. There is potential that these transactions could be recorded
incorrectly resulting in potential material misstatement of the financial
statements of the Company. Where the Company identifies a transaction as
potentially complex or non-routine it will utilize the services of external
experts to provide guidance and advice.
Turbo Power Systems Inc.
Condensed consolidated interim statement of comprehensive income
Unaudited
Notes Quarter ended 31 March
2012 2011
GBP '000 GBP '000
Revenue 5 4,525 2,083
Cost of sales (3,948) (1,395)
--------------------------
Gross Profit 577 688
Expenses
Distribution expenses (211) (159)
Research and product development
expenses (953) (950)
General and administrative expenses (1,336) (1,166)
--------------------------
Total expenses (2,500) (2,275)
Operating loss (1,923) (1,587)
Finance expense (138) (30)
--------------------------
Loss before tax (2,061) (1,617)
Income tax expense - -
Net loss and total comprehensive loss
for the quarter (2,061) (1,617)
--------------------------
--------------------------
Loss per share - basic and diluted 6 0.1p 0.1p
--------------------------
--------------------------
The Notes form an integral part of these condensed consolidated interim
financial statements.
Turbo Power Systems Inc.
Condensed consolidated interim statement of financial position
Unaudited
As at 31 As at
Notes March 31 December
2012 2011
GBP '000 GBP '000
Current assets
Restricted cash 23 23
Inventories 3,199 3,201
Trade and other receivables 4,185 3,203
Prepayments 463 326
Cash and cash equivalents 262 653
----------------------------
8,132 7,406
----------------------------
Non-current assets
Intangible assets 333 350
Property, plant and equipment 966 777
Restricted cash 320 320
----------------------------
1,619 1,447
----------------------------
Total assets 9,751 8,853
----------------------------
----------------------------
Current liabilities
Trade and other payables 5,631 5,453
Loans and borrowings 8 9,170 8,166
Provisions 1,496 540
----------------------------
16,297 14,159
----------------------------
Non-current liabilities
Loans and borrowings 8 1,800 -
Provisions - 1,020
----------------------------
1,800 1,020
----------------------------
Total liabilities 18,097 15,189
Equity (deficit)
Share capital 7 62,862 62,862
Convertible shares 7 15,310 15,310
Other reserves 1,797 1,756
Retained equity/(deficit) (88,315) (86,254)
----------------------------
Equity (deficit) (8,346) (6,326)
Total liabilities and equity
(deficit) 9,751 8,853
----------------------------
----------------------------
Approved by the Board:
J J M Pessoa, Chairman
12 May 2012
The Notes form an integral part of these condensed consolidated interim
financial statements.
Turbo Power Systems Inc.
Condensed consolidated interim statement of changes in equity
Unaudited
Share Convertible Other Retained
capital shares reserves deficit Total
GBP '000 GBP '000 GBP '000 GBP '000 GBP '000
Balance at 31 December
2010 62,862 15,310 1,681 (80,081) (228)
Net loss for the
quarter - - - (1,617) (1,617)
----------------------------------------------------
Balance at 31 March
2011 62,862 15,310 1,681 (81,708) (1,855)
Net loss for the 9
months - - - (4,556) (4,556)
Stock compensation - - 75 - 75
----------------------------------------------------
Balance at 31 December
2011 62,862 15,310 1,756 (86,254) (6,326)
Net loss for the
quarter - - - (2,061) (2,061)
Stock compensation - - 41 - 41
----------------------------------------------------
Balance at 31 March
2012 62,862 15,310 1,797 (88,315) (8,346)
----------------------------------------------------
----------------------------------------------------
The Notes form an integral part of these condensed consolidated interim
financial statements.
Turbo Power Systems Inc.
Condensed consolidated interim statement of cash flows
Unaudited
Quarter ended 31 March
2012 2011
GBP '000 GBP '000
Cash flows from operating activities
Loss for the quarter (2,061) (1,617)
Adjustments for
Finance expense 138 30
Depreciation of property, plant and equipment 135 167
Share based payment expenses 41 -
--------------------------
Operating cash flows before movements in working
capital (1,747) (1,420)
Changes in working capital items
Decrease/(increase) in inventories 2 (720)
Decrease/(increase) in trade and other
receivables (1,070) (495)
Decrease/(increase) in prepayments (137) -
Increase/(decrease) in provisions (64) -
Increase/(decrease) in trade and other payables 112 867
--------------------------
Net cash used in operating activities (2,904) (1,768)
--------------------------
Taxes received - -
--------------------------
Net cash used in operating activities (2,904) (1,768)
Cash flows from investing activities
Purchase of property, plant and equipment (238) (27)
Purchase of intangible assets (69) -
--------------------------
Net cash used in investing activities (307) (27)
--------------------------
Cash flows from financing activities
Proceeds from increase in loans 2,820 1,200
--------------------------
Net cash from investing activities 2,820 1,200
--------------------------
Net decrease in cash and cash equivalents (391) (595)
Cash and cash equivalents at the beginning of the
period 653 799
--------------------------
Cash and cash equivalents at the end of the period 262 204
--------------------------
--------------------------
The Notes form an integral part of these condensed consolidated interim
financial statements.
Turbo Power Systems Inc.
Notes to the condensed consolidated interim financial statements
Unaudited
1 Reporting entity
Turbo Power Systems Inc. ("The Company") is subsisting pursuant to the Business
Corporations Act (Yukon Territory). The Company's registered office is Suite
200-204 Lambert Street, Whitehorse, Yukon Y1A 3T2, Canada.
The Company conducts operations through its wholly owned subsidiary company,
Turbo Power Systems Limited ("TPSL") and the main trading address is Unit 3,
Heathrow Summit Centre, Skyport Drive, Hatch Lane, West Drayton, Middlesex UB7
0LJ, United Kingdom.
The Company's parent undertaking is TAO Sustainable Power Solutions (UK) Limited
("TAO UK"), a company registered in England and Wales, UK. The Company's
ultimate parent company is Vale Solucoes em Energia S.A. ("VSE"), a company
registered in Brazil.
The Company's subsidiaries comprise:
Trading Place of
status incorporation % Ownership
Turbo Power Systems Limited Trading England 100%
Turbo Power Systems Development
Limited Dormant England 100%
Turbo Power Systems N.A. LLC Dormant USA 100%
Intelligent Power Systems Limited Dormant England 100%
Nada-Tech Limited Dormant England 100%
TPSL has initiated commercialisation of its technology in relation to high speed
permanent-magnet machine systems for power generation and industrial motor
applications at its London location, whilst its operation based in North East
England is an established provider of advanced power electronics.
2 Going concern
These condensed consolidated interim financial statements have been prepared on
the basis of International Financial Reporting Standards ("IFRS") applicable to
a going concern, which assume that the Company will continue in operation for
the foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of operations.
As at 31 March 2012 the Company had net operating cash outflows. The cash
position at the beginning of the year and all the necessary investments to
support the growth plan will require additional funding which, if not raised,
may result in the curtailment of activities.
The Company has a cumulative deficit of GBP 88.32 million as at 31 March 2012.
At 31 March 2012 the Company had an unrestricted cash balance of GBP 0.26
million and held further cash of GBP 0.34 million associated with rent deposit.
If the Company is unable to generate positive cash flow from operations or
secure additional debt or equity financing these conditions and events would
cast substantial doubt regarding the going concern assumption and, accordingly,
the use of accounting principles applicable to a going concern. These interim
condensed consolidated financial statements do not reflect adjustments to the
carrying values of the assets and liabilities, the reported expenses and the
balance sheet classifications, which could be material, which would be necessary
if the going concern assumption were not appropriate.
On 30 January 2012 the Company announced that it had extended the loan financing
agreement with TAO UK, its parent undertaking, to provide the Company with
access to a further GBP 1.02 million of debt financing to support working
capital requirements, under the same terms and conditions as the previous loans.
On 26 March 2012 the Company announced that it had extended the loan by a
further GBP 1.80 million to support working capital requirements, but that this
portion of the loan will be repayable on 1 April 2014.
The Directors regularly review and consider the current and forecast activities
of the Company in order to satisfy themselves as to the viability of operations.
These ongoing reviews include consideration of current order book and future
business opportunities, current development and production activities, customer
and supplier exposure and forecast cash requirements and balances. Based on
these evaluations the Directors consider that the Company is able to continue as
a going concern.
3 Basis of preparation
These condensed consolidated interim financial statements have been prepared in
accordance with IAS34 Interim Financial Reporting.
The Company's interim condensed consolidated financial statements were prepared
in accordance with the accounting policies set out in Note 3 to the consolidated
financial statements for the year ended 31 December 2011, and using the same
methods of computation.
The interim condensed consolidated financial statements were authorised for
issuance by the Board of Directors on 12 May, 2012.
The interim condensed consolidated financial statements have been prepared under
the historical cost convention, except for the revaluation of certain financial
instruments.
The interim condensed consolidated financial statements are presented in GBP
sterling, rounded to the nearest GBP 1,000, which is the Company's functional
and presentation currency.
4 Critical accounting judgements and key sources of estimation uncertainty
These interim condensed consolidated financial statements have been prepared on
the basis of International Financial Reporting Standards applicable to a 'going
concern', which assume that the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of operations. As at 31 March 2012 the Company
had net operating cash outflows. Therefore the Company may require additional
funding which, if not raised, may result in the curtailment of activities. The
Company has a cumulative deficit of GBP 88.32 million as at 31 March 2012.
Further information on Going Concern is provided in Note 2.
The preparation of financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets and
liabilities, revenue and expenses and the related disclosures of contingent
assets and liabilities. Although these estimates are based on management's best
knowledge of the amount, event or actions, actual results ultimately may differ
from those estimates.
Estimates and underlying assumptions are continually evaluated and are based on
historical experience and other factors, including expectations of future events
that are believed to be reasonable under the circumstances. Revisions to
accounting estimates are recognised in the period in which the estimates are
revised and in any future period affected.
The estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.
5 Segmental analysis
The Company has historically operated from two facilities in the UK and run each
location as a separate unit. During 2011 the Company underwent management and
operational changes to bring the reporting segments in line with the strategy of
designing and manufacturing integrated systems. The Company's two reportable
segments have therefore changed from the power electronics segment, which is
involved in the development and manufacture of electrical power supply and
control systems and the electrical machines segment, which is involved in the
development and commercialisation of high speed electrical machines. The Company
now operates a more integrated operation structured along the lines of product
research and development, and production. The Board and management review the
results of the Company on this basis. As such the segmental report for 2012 has
been presented on that basis, with the comparatives for 2011 presented on the
same basis.
Corporate charges relating to the financing of the Company and other related
management activities are allocated between the two reportable segments.
Both segments operate in the United Kingdom. Except for the investments held by
the Company which are located in Canada, all of the Company's assets are located
in the United Kingdom.
31 March 2012 Production Development Unallocated Total
GBP '000 GBP '000 GBP '000 GBP '000
Revenue 4,132 393 - 4,525
Segment operating loss (658) (1,265) - (1,923)
Finance expense - - (138) (138)
Net loss and total
comprehensive loss (658) (1,265) (138) (2,061)
Total assets 6,111 1,084 2,556 9,751
Total liabilities (2,989) (1,654) (13,304) (17,947)
31 March 2011 Production Development Unallocated Total
GBP '000 GBP '000 GBP '000 GBP '000
Revenue 1,794 289 - 2,083
Segment operating loss (534) (1,053) - (1,587)
Finance expense - - (30) (30)
Net loss and total
comprehensive loss (534) (1,053) (30) (1,617)
Total assets 2,128 1,545 3,039 6,712
Total liabilities (1,612) (1,419) (5,525) (8,556)
Geographic Segmental Information
Total Revenues by destination Quarter ended 31 March
2012 2011
GBP '000 GBP '000
UK 532 581
USA 1,520 746
Canada 1,706 472
Rest of world 767 284
--------------------------
4,525 2,083
--------------------------
--------------------------
All property, plant and equipment was located within the United Kingdom during
both periods ended 31 March 2012 and 31 March 2011.
6 Loss per share
Loss per common share has been calculated using the weighted average number of
shares in issue during the relevant financial periods.
Quarter ended 31 March
2012 2011
Numerator for basic loss per share
calculation:
Profit/(loss) attributable to equity
shareholders (2,061,000) (1,617,000)
Denominator:
For basic net loss - weighted average shares
outstanding 1,437,754,811 1,437,754,811
Basic and diluted
Loss per common share - pence 0.1p 0.1p
As the Company experienced a loss in both years all potential common shares
outstanding from dilutive securities are considered anti-dilutive and are
excluded from the calculation of diluted loss per share.
Details of anti-dilutive potential securities outstanding not included in EPS
calculations at 31 March are as follows:
Quarter ended 31 March
2012 2011
Common shares potentially issuable:
- under stock options 31,377,273 32,217,278
- pursuant to A Ordinary Share conversion 448,333,334 448,333,334
-------------------------------
479,710,607 480,550,612
-------------------------------
7 Share capital and options
Share capital and other reserves
Convertible Shares
Share Capital Common Shares (A Ordinary Shares)
Number GBP '000 Number GBP '000
At 31 March 2011 & at
31 December 2011 & at
31 March 2012 1,437,754,811 62,862 448,333,334 15,310
-----------------------------------------------------
-----------------------------------------------------
The Company is authorised to issue an unlimited number of common shares and an
unlimited number of preferred shares, issuable in series, without nominal or par
value. All common shares rank equally with regard to the Company's residual
assets.
The holders of common shares are entitled to receive dividends as declared from
time to time, and are entitled to one vote per share at meetings of the Company.
Holders of A Ordinary Shares of Turbo Power Systems Limited ("TPSL")
(Convertible shares), carry no voting rights, cannot attend any shareholder
meetings and, in the event of winding-up of TPSL are entitled to a maximum
distribution of GBP 500,000 in aggregate, to rank before the Common Shares. The
A Ordinary shares are convertible into an equal number of Common Shares of the
Company on request by the holder, having given 61 days' notice. Under certain
take over or change in control events, the A Ordinary Shares are exchangeable
under "super exchange" rights, converting for 3 Common shares of the Company for
every A Ordinary Share held.
As the A Ordinary Shares are non-participating interests in TPSL and are
non-voting, no current year or cumulative net losses have been allocated to the
A Ordinary Shares.
Other reserves
At 31 March 2012, other reserves comprise of the stock compensation reserve of
GBP 1,797,000 (31 December 2011: GBP 1,756,000).
Potential issue of common shares
The Company has issued share options under the 2002 Stock Option Plan and A
Ordinary Shares that are convertible into common shares of the Company.
31 March 31 Dec
2012 2011
Under stock option plan 31,377,273 31,377,273
Pursuant to A Ordinary Share conversion 448,333,334 448,333,334
-------------
479,710,607 479,710,607
--------------------------
8 Related party transactions
Transactions with the parent and ultimate parent company
On 22 October 2010 the Company completed a loan funding facility from its
majority investor, TAO UK, that made available up to GBP 1.9 million (amended as
below) to support the working capital requirements of the Company as it
develops. The loan carries a 6% interest rate and is secured by a fixed and
floating charge over the assets of the Company, and is repayable on 30 days'
notice (except the 26 March 2012 amendment which is repayable on 1 April 2014).
A summary of the drawdowns is :
Date of drawdown GBP '000
28 October 2010 GBP 1,200
26 November 2010 GBP 700
25 February 2011 GBP 800
28 March 2011 GBP 400
15 April 2011 GBP 2,200
25 May 2011 GBP 1,000
5 September 2011 GBP 1,500
20 December 2011 GBP 350
3 February 2012 GBP 600
8 February 2012 GBP 420
26 March 2012 GBP 1,800
Accrued interest GBP 491
---------------
Total GBP 11,461
---------------
Accrued interest is recorded within trade and other payables (31 December 2011:
GBP 353,000)
During the quarter ended 31 March 2012 the Company transacted business with TAO
UK, totalling GBP nil (2011: GBP 44,000), and with VSE, totalling GBP 96,310
(2011: GBP nil). Amounts outstanding as at 31 March 2012 are: the Company owes
TAO UK GBP nil (31 December 2011: GBP 63,000); VSE owe GBP 22,720 (31 December
2011: GBP nil) to the Company.
All transactions were conducted within the normal course of business for supply
of engineering design services and were transacted at exchange amount, which is
the amount agreed for the transaction.
Key Management personnel compensation
In addition to their salaries, the Company provides non-cash benefits to
executive management and contributes to a defined contribution pension plan.
Some executive officers participate in the share option programme.
Key management personnel compensation comprises the following:
Quarter ended 31 March
2012 2011
GBP '000 GBP '000
Salaries 189 186
Bonus and other payments - 280
Pension contributions 13 7
Stock compensation expense 41 -
--------------------------
243 473
--------------------------
--------------------------
Bonus and other payments in 2011 include payments made in relation to the change
of control in June 2010, arising from the TAO UK investment in the Company, and
termination payments.
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